Dispute Resolution | Criminal Law

Kateryna Gupalo,

Criminal Tactics

«In Ukraine more and more top law firms are opening a white collar defense practice»
Kateryna Gupalo, Counsel at Arzinger Law Office says

In your opinion, is there now less pressure on business from law-enforcement bodies?  

— The Criminal Code of Ukraine is still the bible for many companies, including foreign firms represented in Ukraine. Despite recurrent public initiatives, there are still too many criminal proceedings after tax audits, which result in additional tax liabilities. Even for accountants in international companies a visit to an investigator has become an ordinary thing.  

The only difference is that the materials of a tax audit regarding the refunding of VAT are more and more often being sent to "ordinary" district police offices. And if the tax police have already acquired some skills and have a good understanding of the peculiarities of criminal proceedings upon the results of tax audits, ordinary police officers still have to learn a lot about taxes.


It is logical to assume that the legal services market cannot ignore such trends. What trends could you describe?  

— As a result of these processes, while in the EU white collar defence is dealt with by small boutique law firms, in Ukraine more and more top law firms are opening such a practice because their clients, big companies, including international firms, need qualified criminal lawyers. Taking into consideration  the current state of affairs, we can assume that white collar defence will remain in demand for quite a long time.


Could you tell us more about criminal proceedings in which your clients are involved?

— There are a lot of criminal proceedings about so-called "bad" contracting parties. However, case plots may become very complicated. There are more and more cases where founders or directors take plea bargains and supplies to specific contracting parties are recognized as fictitious. In this regard, the most common plea is admitting fictitious entrepreneurship under Article 205 of the Criminal Code of Ukraine.

The Criminal Procedural Code of Ukraine, namely Part 7 Article 474, directly prohibits courts from  approving plea deals regarding the interests of third parties. A plea deal containing an assessment of a third party's activity is nothing less than violation of the rights of such third party. Its activity is basically assessed without its involvement in the criminal proceedings. Respectively, approval of the plea deal taken by the founder/director of the supplier would be an unpleasant surprise to the taxpayer.   

At the same time, despite the prohibition above, taxpayers whose transactions have been declared "on paper only" cannot even appeal against the approval of the plea deal. This is because Paragraph 1 Part 4 Article 394 of the Criminal Procedural Code of Ukraine limits the number of persons entitled to appeal against respective verdicts, namely to the convicted itself and the state prosecutor. The latter are obviously not interested in appealing against the deal. And appeals against such verdicts filed by taxpayers are always dismissed.  


What should companies do in a situation when a supplier's director/founder has basically unilaterally declared transactions to be "on paper only"?

— The defence strategy in a criminal case against officers of a company-buyer shall be diversified. Even if a supplier's founder/director has stated in the plea agreement that the company or its transactions are fictitious, there are still other persons who can confirm the supply of goods by the respective company. Potential witnesses may be found not only among the company's employees. As a rule, goods are stored somewhere and transported by someone. You should look for potential witnesses there.

Moreover, we try to find, first of all, the director/founder of the supplier in question. It can be a nominal director or a person who signed the deal just to relieve the pressure from the law-enforcement agencies or to avoid more serious charges than a relatively low fine under Article 205 of the Criminal Code of Ukraine.

You should not forget about documentary evidence and approach the issue broadly. It means that in addition to the standard package of primary documents you should, depending on the delivery terms, contact warehouses or forwarding companies and ask for supplementary documentary evidence.


Is this just a local problem?  

Until recently this has been the case. But lately the story with "bad" Ukrainian contracting parties has been backfiring on non-residents as well. It concerns firms who do not have operations in Ukraine but purchase goods of Ukrainian origin from third parties. The market often dictates that non-residents may purchase goods only against prepayment. The ownership rights under the contract are often transferred after the customs clearance of the respective goods. And it is at thisexact periodoftimethat  the risk of artificial (on trumped-up reasons) creation of a situation in which further movement of the goods would be impossible, arises.


How do law-enforcement agencies 'immobilize' goods?  

— They have quite a lot of instruments. They apply provisions from both current criminal and customs legislation but also stoop to not quite legal methods. There are cases when cargo is held and not being brought to a customs office only because of a letter from law-enforcement agencies.  

The Criminal Procedural Code gives many possibilities as well. Goods may be seized. For non-residents who have already paid for goods but will acquire the ownership rights only after the customs clearance, this constitutes quite a problem. Not to mention perishable goods that, as a matter of fact, may be sold at public auctions.

Moreover, we have had cases where investigators had no sufficient grounds to impose arrest on goods, so they applied for temporary access to goods (i.e. goods kept at the port) with the right of seizure. After issuance of the respective protocol the goods became subject to limitations and risked being sold at a public auction.   

The Customs Code of Ukraine provides enough weapons as well. It is possible to issue a protocol stating  violation of customs rules under Article 483 of the Customs Code of Ukraine which results in a fine in the amount of 100% of the value of goods and their confiscation. And the grounds are simple – if the supplier/exporter and its director cause concerns, the authenticity of the documents submitted for the customs clearance may be questioned as well. 

All these actions are applied within the framework of the officially declared goal of fighting shady business. However, the main blow does not strike shady business as much as non-residents who have not done anything wrong and are not parties to criminal proceedings. It is non-residents who are ones who suffer the main losses. As a result, some press releases issued by government authorities report increasing exports and goals to expand even more while others praise the fight against shady business, the consequence of which is an actual reduction in exports. This is what we see with our clients nowadays.